LPEM UI Economist: BI Needs To Maintain Reference Interest Rates To Reduce The Impact Of Middle East Conflict

Illustration. (Photo: Doc. Antara)

JAKARTA - Economist of the Economic and Community Research Institute (LPEM) of the Faculty of Economics and Business, University of Indonesia (FEB UI) Teuku Riefky said that Bank Indonesia (BI) should maintain its benchmark interest rate of 6 percent to reduce the impact of geopolitical tensions in the Middle East.

"Rupiah is currently facing enormous currency pressure and a surge in capital outflows in the past two weeks, triggered by geopolitical tensions in the Middle East," said Teuku Riefky in Jakarta, quoted from Antara, Wednesday, April 24.

According to him, the increasing tension between Iran and Israel raises sentiment that the United States' central bank, the Federal Reserve System or the Fed, has the potential to hold its benchmark interest rate longer.

He said that this prompted investors to divert their portfolios from the domestic capital market. During the first week after the Eid holiday, capital flow came out of 490 million US dollars.

Meanwhile, the accumulated capital output over the past month as of March 18 to April 18 reached 2.11 billion US dollars and was recorded as the largest monthly outflow since last September.

"As a result, the yield of 10-year tenor Government Securities (SUN) increased to 7.03 percent from 6.67 percent in the previous month, reaching its highest point in the last five months," said Riefky.

He said that one year SUN tenor yields also jumped to 6.33 percent from 6.19 percent in the previous month.

BI also responded by increasing the intensity of monetary intervention through a triple intervention strategy, namely active intervention in the foreign exchange spot market, purchasing Government Securities (SBN), and intervention in the domestic non-delivery forward (DNDF) market.

Riefky stated that the interventions carried out by BI in the past week were finally able to stabilize the rupiah exchange rate, although only in the range of Rp. 16,200 per US dollar due to the amount of external pressure.

The rupiah has so far been depreciated at around 2.98 percent month-to-month (mtm) or 5.5 percent year-to-date (ytd) against the US dollar and is listed as one of the worst-performing currencies compared to peer country and only better than Lira Brazil in the past month.

"Although there is room for an increase in the benchmark interest rate, the decision to raise the BI benchmark interest rate does not seem to be the ideal step that needs to be taken at this time," he said.

The latest conflict between Iran and Israel was triggered by an attack on the Iranian Consulate in Damascus, Syria on April 1.

Iran then launched a counter-attack by firing hundreds of ballistic missiles and unmanned aircraft at Israel on April 13.

In the early hours of April 19, Israel launched a missile that allegedly targeted an air base near Isfahan City, Iran.